Qualifying for a Solo-K (also known as an Individual K, Uni-K or Self-Administered 401(k) is not difficult but, there are some activities that the IRS does not consider to be active by nature…and, hobbies are not considered self-employment activities…with a caveat!
The IRS has provided some tips on when your “activity” may not actually be self-employment activities, rather a hobby. Here are some helpful tips that may help you determine whether you have a “hobby” or a business. The list is not intended to be the final predictor of your situation, rather a list that may give you some direction.
Carrying on an in a businesslike manner? — In and of itself, this is not a final indicator, but a good peek as to whether you are self-employed. Do you have an office? Do you have set work hours? Do you conduct presentations, email, mail, “cold-call” or otherwise make efforts to increase your sales?
The amount of time you put into the activity? – Let’s be blunt, if you were doing this activity one hour per week, it might be hard to justify you are self-employed. However, having a set schedule (generally) of what activities you do during certain hours of the day, that would tend to show you are working your business.
Does the activity support you financially? This can be misleading, but you get the gist. As the saying goes, the devil is in the details. You could work a part-time business just to save money. Facts matter. You could have a legitimate business but not use the money to live on. But, it is another factor to consider.
Losing/Spending money with the activity – Again, not a predictor, but can be an indicator. If you had a business and can show that you actually expended funds, you would certainly seem to be trying to work your business. However, on the flip-side, you could have a hobby (e.g., purchasing supplies) with no real intent to run a business.
Changing activities to increase your business – In your business you undoubtedly will make changes to your schedule if it means improving your business. Doing a blog, conducting SEO activities for your website, trying to determine how you can reduce expenses and increase revenue. In contrast, and no offense to hobbyists, they may tend to say, “if the person wants to buy this model airplane, they can wait for me. I don’t need their money.”
Is your business making money and does it vary by year? – This can be an indicator if your business is operating continuously and without changes.
Expecting future revenues from current activities? — Let’s face it, you have to plant the seed for the harvest! Very true with your self-employed business. You may not reap the benefits for some time…but, that does not mean that you are not self-employed. Not at all…you may just be involved in an activity whose harvest has not yet been realized yet!
Because I enjoy wine, I think about someone who is licensed to produce and sell wine and may make wine that they do not sell immediately. This is an easy reference as wine isn’t produced in a week or month. Hobby or self-employed? I think most of us would say self-employed. Also, think of a real estate agent who sells the occasional home. Hobby or self-employed? Well, my guess is that even the least successful real estate agent who sells a minimum number of homes would certainly say and consider themselves self-employed.